Steel demand in emerging economies struggles

Right now in Vietnam, it is cheaper to buy Indian or Russian coil than Chinese.

For avid readers of this report, we have for many months noted the weakness in steel demand in emerging economies, but it is worthwhile to bring this issue to the forefront.

In H1 2017, traditionally the largest single exporter of flat products (outside China) of Russia exported 8% year-on-year more steel. But its Number 2 position was superseded by India, where export volumes were up 150% to more than 5m tonnes in the first half. Turkey also increased exports by 80% in the same period. Exports from other emerging economies such as Brazil and South Africa did not increase, but were already at high levels due to weak demand in 2016 and have stayed that way through 2017.

The increase in exports far outstrips the increase in output – highlighting that there is weak domestic demand in these economies (with higher output driven by exports). It is clear that while GDP may be recovering in emerging economies, this could be down to commodity factors (e.g. higher oil) or service growth (India) rather than steel-intensive sectors.

This is concerning. In the medium-term, it will have to be steel demand in these emerging economies that will offset the expected decline in Chinese demand.

Part of the increase in exports took some market share from China, but its exports in the first half were only down around 6% or around 1m tonnes.

So the increase in emerging market supply has gone primarily into mature economies. This tends to build inventories, but it also increases the risk of AD action in those countries that will seek to protect their markets against the new suppliers. Russian supply is already under pressure as it will have to divert up to 2m tpy of HR coil to non-EU markets. The rapid increase in Indian volumes to Europe is already stirring concern.

Chinese strength (along with global re-stocking) has supported steel markets in 2017. In the short-term slowing demand in China will be offset by cuts in supply. But if those cuts are not enough and emerging market demand continues to struggle, re-stocking in mature markets will not be enough on its own to maintain the elevated profit margins for the steel industry, meaning an H2 correction in 2018 may be looming.